Limitations of India's Covid response

The second wave of the pandemic has been absolutely devastating. Although the number of cases is coming down, the level is still uncomfortably high. Most states have imposed lockdowns to contain the spread of the virus, which is affecting economic activity. Consequently, analysts are revising their growth projections. The decline in economic activity this time is not as severe as last year, but that is hardly a consolation. The second wave would significantly increase the quantum of output that will permanently be lost because of the pandemic. The government has also made a number of errors in handling the situation and should now focus on containing the damage. Economic recovery will remain feeble till the pandemic is convincingly controlled. The International Monetary Fund’s Chief Economist Gita Gopinath and others have rightly noted that pandemic policy is economic policy. In this context, this column assesses three aspects of India’s response to the second wave: Fiscal policy, vaccination policy, and Centre-state coordination.

Fiscal response: Unsurprisingly, it is being argued that the government should increase spending to support the economy. The government has done well by restarting free distribution of food grains to the most vulnerable sections of the population. It should also be open to increasing allocation to the rural employment scheme as required. However, a large-scale spending increase to boost demand would not be feasible. Government finances are far more stretched compared to the beginning of the pandemic. The central government ran a fiscal deficit of 9.5 per cent of gross domestic product (GDP) in 2020-21. Given the contraction in economic activity, revenues would again be under stress and containing the deficit at 6.8 per cent of GDP in the current year could become difficult. Besides, India’s public debt has expanded to about 90 per cent of GDP.

It is often argued that unprecedented situations call for unprecedented action, but it can also result in unprecedented consequences. Faster than expected economic recovery in advanced economies and tighter global financial conditions could increase risks for emerging market countries like India with stretched government finances and rising public debt. Another significant increase in government borrowing will also be difficult to handle domestically. A recent study showed that poverty has gone up sharply. Unfortunately, India doesn’t have the capacity to run large income support programmes.

However, in terms of dealing with the pandemic, lack of institutional and medical capacity has weakened India’s fight far more than the availability of financial resources. Delhi and other cities, for instance, did not suffer oxygen shortages because of a lack of funds. Also, money can perhaps buy more testing kits or ventilators, it cannot ensure proper usage. It has been widely reported that testing capacity in a number of states, particularly in rural areas, is extremely limited. In several areas there is no one who knows how to use the existing stock of ventilators. Another big example of India’s low institutional capacity is even in the middle of a pandemic, it could not set up sanctioned oxygen plants for months. All this is not to suggest that the government should not spend on building medical infrastructure. But it is critical to note that money alone cannot bolster India’s medical capacity overnight to the level desired.

Vaccination policy: The pace of vaccination has been a big disappointment. Vaccinating a large proportion of the population in a quick time was doable for India. The government not only avoided negotiations with foreign firms, but it also didn’t place sufficient orders with domestic manufacturers. Not being able to secure sufficient supplies despite having the vaccines and a large manufacturing base is perhaps the biggest policy error of recent times. The government has also attracted a lot of criticism for opening up the vaccination programme for the private sector. It is obvious to argue that vaccination should be free for everyone. But India needs scale and the private sector can provide that. Given the capacity constraints in the public sector, if a section of the population — which is also willing to pay — is handled by the private sector, it will ease pressure on government infrastructure. Further, higher prices in the private sector would enable manufacturers to supply to the government at a lower cost. Besides, the private sector would be able to import separately, which will augment overall supply.

Centre-state coordination: The Union government did well to not impose a nationwide lockdown this time. States are in a better position to make such decisions. States will need to respond differently, depending on the caseload. However, leaving everything for states is not a wise strategy. The Centre should be coordinating with states more actively. This will enable quicker adoption of effective practices in different states. The Centre has also opened up vaccine procurement for states. Opening up the vaccination programme for the private sector is one thing and has sound reasons, but asking states to procure separately, including from international markets, made no sense. Unsurprisingly, requests from states have been turned down by several foreign manufacturers. Covid vaccines are not something that states will be able to buy by floating tenders. It will require negotiations and bargaining power.

Therefore, the Centre should do all government procurement and transparently distribute it among states. Financing should not be an issue in this context. The government may not be in a position to make large cash transfers to boost demand, but spending on vaccines is unlikely to have a material impact on its finances. In fact, it will boost revenues by increasing economic activity. Without a quick increase in the pace of vaccination, lockdown relaxations would be hesitant and escalate the overall economic cost.